Groundz Coffee Shop uses 4 pounds of a specialty tea weekly; each pound costs $1

Question

Groundz Coffee Shop uses 4 pounds of a specialty tea weekly; each pound costs $16. Carryingcosts are $0.25 per pound. It costs the firm $8 to prepare an order. Assume the basic EOQ modelwith no shortages applies. Assume 52 weeks per year.

a. How many pounds should Groundz order at a time?

b. What is total annual cost (excluding item cost) of managing this item on a cost-minimizingbasis?

c. What is the annual ordering cost? Annual holding cost? Why are they equal?

d. The current practice is to order for two weeks of demand (8pounds). Which cost will go up andwhich cost will go down and why?

Explanation / Answer

a. Groundz should order 115 pounds at a time.

b. Total annual cost is $ 29

c. annual ordering cost = 14. annual holding cost = 14 . these costs are equal, because of the nature of total cost curve, which is minimum at a point where holding cost is equal to carrying cost.

d. with current practice of ordering only two weeks of demand, ordering cost would go up, because number of orders per year will increase. holding cost would go down, because average inventory will reduce, because of the small order size.

EOQ Policy Weekly demand 4 Annual Demand = D 208 Unit Price (P) 16 Ordering Cost (O) 8 Annual Holding Cost (H) 0.25 Optimal Order Qty (Q) 115 EOQ =(2*D*O/H) Inventory Holding Cost (HC) = Q/2*H 14 Annual Ordering Cost (OC) = D/Q*O 14 Total Inventory mgmt Cost 29

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